Insured-Loss Estimate for Sandy: Up to $10 Billion

By

Erik Holm

Updated Oct. 29, 2012 4:22 p.m. ET

Hurricane Sandy is expected to become one of the top 10 most expensive hurricanes in U.S. history, according to disaster-modeling company Eqecat.

The storm, which will deliver powerful wind gusts and heavy rains to the some of the most populous parts of the U.S., could cost the insurance industry between $5 billion and $10 billion, Eqecat estimated Monday.

At the high end of that range, Sandy would rank as the fifth-most expensive hurricane of all time, surpassing Hurricane Charley, which caused an inflation-adjusted $8.8 billion in insured losses when it struck Florida and the Carolinas in 2004.

Damage estimates from Eqecat and other disaster-modeling companies are closely tracked by the insurance industry for the early indication they can provide about the financial impact of major catastrophes on insurance-company capital.

Wall Street analysts that track the insurance industry say insurers will easily be able to absorb a loss of $5 billion to $10 billion. The 2012 hurricane season has been uneventful until now, and insurers are considered flush with cash.

Even at the low end of the Eqecat range, Sandy would become the 10th-most-expensive hurricane in history, surpassing last year's Hurricane Irene, which cost the insurance industry $4.3 billion.

Michael Kistler, director of model solutions for Risk Management Solutions Inc., said Sandy is larger and slower-moving than Irene. While RMS hasn't issued a damage estimate, Mr. Kistler said forecasts indicate Sandy has the potential to cause more wind damage and coastal flooding than last year's storm—especially in and around New York City.

"There will be winds from Lake Michigan all the way to New England," Mr. Kistler said. "The places that have a probability of sustaining wind damage are going to be much larger and the wind may be slightly stronger" than from Irene.

Inland flooding could be less severe than from Irene, in part because there haven't been earlier storms this year that began saturating the ground, as there were last year before Irene hit, he said.

Another historical precedent: a 1903 hurricane that struck as a category one storm on roughly the same part of the New Jersey coastline that appears to be in Sandy's crosshairs.

Mr. Kistler said the 1903 storm would cause about $4.1 billion in damage if it were to strike today. Hurricane Sandy is much larger than the 1903 storm and has the potential to do more damage, Mr. Kistler said. (Hurricanes weren't typically assigned named until the 1950s.)

Eqecat also predicted economic losses, which include damage that isn't covered by insurance, could be as high as $20 billion. Economic losses from last year's Hurricane Irene were $10 billion.

The cost to the insurance industry will be somewhat muted because home insurers generally don't pay for damage caused by flooding. Sandy is expected to bring powerful waves to a large swath of the East Coast, but much of the cost will be born by the federal government's National Flood Insurance Program.

Companies can also buy so-called business-interruption coverage that may reimburse them for some costs when a disaster disrupts their operations or their supply chains.

Barry Buchman, a lawyer with Gilbert LLP in Washington, DC, predicted such disruptions could be even more far reaching than the storm itself.

"The Eastern Seaboard contains some of the most important cities in the country...whose institutions regularly interact with other parts of the country," he said. "The fact that New York City is essentially shut down, for example, may have ripple effects in other parts of the country."

By any measure, Sandy would cost far less than 2005's Hurricane Katrina. That storm caused $46.6 billion in losses in present-day dollars, the most-expensive natural disaster in U.S. history.

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